The relationship between changing economic structure and performance: diversification, diversity, growth, stability, and distribution impacts

Abstract

The major objectives of this study are to: (i) improve the understanding of what is meant by economic diversification and economic diversity, (ii) provide a comprehensive conceptual framework for region-specific analysis of the relationship between changing economic structure and economic performance measured in terms of the growth, stability, and distribution of income and employment, and (iii) construct an operational model of a regional economy that can be used to assess the impacts of alternative development strategies.

This study attempts to sort out the overlaps, contradictions, and gaps among the different economic and finance theories, and the different definitions and measures of economic diversification and diversity. The subject of economic diversification or diversity is addressed in the context of the question: "What is the relationship between a region’s changing economic structure and performance?"

A structural model of a regional economy, an extended input-output model based on a social accounting matrix (SAM), serves as the foundation of the conceptual framework and operational model. The SAM-based input- output model explicitly depicts the functional relationship between economic structure and performance. The region’s demand, production technologies, and trade flows are included as part of economic structure. Economic performance is measured as the growth, stability, and distribution of regional income and employment, by occupation group. The structural model is used to analyze the relationship between economic structure and performance for a given time period, and to analyze changes over time. Growth, stability, and distributional impacts are considered simultaneously. By doing this, potential tradeoffs can be explicitly addressed.

To identify the structural sources of growth and stability, the SAM-based input-output model is decomposed at different points in time. By decomposing a SAM-based model it is possible to analyze structural sources of growth and stability in terms of both supply and demand factors. Alternative development strategies can be modelled using this conceptual framework.

The operational model quantifies the relationship between: (i) the anticipated growth and stability of exogenous final demands, and (ii) the anticipated growth, stability, and distribution of endogenous income and employment, by occupation group. The operational model focuses attention on the distributional impacts of changing economic structure and performance. The relationship between a region’s social welfare, and the aggregation scheme and accounting stance used in the analysis of economic impacts are explicitly addressed. As such, there are explicit social welfare criteria for comparing and ranking alternative development strategies. The operational model presented in this study is well-suited to many popular input-output application packages.